Germany

German offshore plans in costs trap

Germany's grand plans for 12 GW of offshore wind power are forcing the country to face economic facts. Wind plant at precious coastal locations are unwelcome, but way offshore nobody can afford to build them -- not without state aid. Developers are pinning their hopes on giant turbines yet to be made and on friendly politicians who can push through cheap-to-develop near-shore sites or provide support for the use of deep water locations

Wind development off Germany's coast may be paralysed in a Catch 22 dilemma that only strong political will coupled with a dedicated public relations effort can solve. The situation has arisen from the best of motives -- the desire to reduce to a minimum the environmental and visual impact of offshore wind stations by siting them way out to sea. But the additional costs of thus avoiding conflict with tourist authorities and environmentalists could make banks and insurers reluctant to handle the projects. It is far more expensive to install a wind plant way offshore and link it to the grid than to develop a near-shore site. What's more, long licensing procedures for any site in German coastal waters could see the country lagging behind its neighbours in developing maritime services and supporting industries.

Germany's engineering federation, Verband Deutscher Maschinen und Anlagenbau (VDMA), and several potential developers of offshore wind stations are urging politicians to support near-shore projects -- and to appeal to residents on Germany's coasts to accept the addition of wind turbines to the horizon so that the industry can gain experience and catch up with competitors abroad.

Alternatively, the government should provide aid to speed the progress of wind stations well out at sea, they say. The VDMA released details early in the summer of a study on the economics of Germany's offshore wind station projects. It reveals that investors should not expect the same rate of return on capital for offshore plant as that provided by onshore stations in Germany, despite the availability of the same wind tariff for a longer period of time.

At all costs

"The German offshore philosophy has been to avoid visual pollution at all costs," explains Norbert Giese of AN Windenergie. For a fairly large country Germany has a tiny coastline -- a stretch of just 570 kilometres along the North Sea, nearly all of which comprises the protected Wattenmeer National Park, and 500 kilometres along the Baltic Sea. Both coastlines are guarded with vigilance by citizens and environmentalists alike.

As a result, wind developers are planning stations sited 30 kilometres or further out to sea where water depths are between 20 and 40 metres, turbine foundations are expensive and grid connection a challenge. To make economic sense, the projects must use large machines of around 5 MW. But no such machines exist as yet.

"So either the authorities must allow us to build near-shore stations with existing, smaller turbines so that we can at least start to build up infrastructure and maritime services. Or the state must provide support for the expensive infrastructure so that we can use smaller, off-the-shelf turbines of say 2 MW at the distant locations where turbines will be barely visible from the shore," Giese argues. "Otherwise the projects may get only restricted loans and insurance cover," he warns.

Giese appeals to politicians and society at large to reconsider their attitude to offshore developments. "If the Danish queen accepted the offshore Middelgrund wind station, clearly visible from her palace, I don't see why the mayor of a German coastal village shouldn't show some flexibility."

VDMA agrees. "We need experience of our own offshore stations to secure the future of the German wind industry on the international market. It's not as though neighbouring countries are going to hang back and wait for the Germans to catch up," says Thorsten Herdan. "If we don't get on board the offshore platform now, the big German offshore projects worth four to five billion each will go to foreign companies," stresses Horst Hannemann of Neptun TechnoProduct in Rostock, who is responsible for the offshore wind sector at VDMA.

"These arguments are only one side of the story," says Heinrich Duden of wind station developer and operator Energiekontor. "Sites for near-shore stations are simply not available for environmental or nature protection reasons," he says. Within the official 12 nautical mile zone (22 kilometres), the Schleswig-Holstein coast is more or less ruled out for wind use, he adds. "The Lower Saxony coast provides more opportunities, but you have to keep away from the North Sea islands." His company is developing three offshore stations, all in the German North Sea.

Duden also has a different view on the potential for infrastructure and maritime services. The VDMA's major concern is wealth and job creation in Germany. "But we don't mind who provides these services, whether Danish, Swedish, Norwegian, UK or German companies, as long as the quality is good. After all, we live in Europe and Germany has never really had much in the way of maritime services," Duden comments.

Machines on the way

Achim Ernst of Winkra notes that wind turbine developers, either of German origin or with facilities in Germany, like AN Bonus, Enercon, Enron Wind and Vestas are gathering offshore experience. "This just happens to be abroad," he notes. Nordex is testing its 2.5 MW turbine onshore and is planning a 5 MW machine with Repower Systems of Husum, he adds. "Winkra Energie is among the contingent of developers who plan not to use the small 1.5-2.5 MW machines but 5 MW turbines," he says. "This means just 70 machines for our 350 MW station in the Baltic." He makes a comparison with the 160 MW Horns Rev project to be built off the Danish coast next year using 80 turbines. "The only difference is that ours will be much further from the coast," Ernst says.

financing IN PRINCIPLE

"It's early in the day to be talking about offshore station financing," says Siegfried Hoffmann of Commerzbank in Bremen. "But in principle we are open to the idea, although clearly the technical and environmental framework has to be there." He notes, though, that in view of the novelty of offshore projects, it could take up to six months to arrange financing.

A report has been commissioned from Fichtner Development by the VDMA, on the costs, the technology and ecology of offshore generation to cast some light on the economics. Preliminary results, presented by Volker Döringer from Fichtner at the Hannover industry trade fair, gave an overview of the investments planned in German offshore stations, as well as the relative costs of large and small offshore stations, also compared with a standard coastal onshore facility.

The study, based on data available in February on what was being planned off the German coast, deals with a potential investment of DEM 33.7 billion in about 9 GW of wind plant. Already by June, the 9 GW of planned projects had risen to around 12 GW (Windpower Monthly, July 2001). In April Fichtner estimated that about half the investment would be spent on infrastructure, including foundations and grid connection. Around 8000 jobs could be created for wind station operation.

Fichtner looks at the likely generating costs of different sized wind stations located 40 kilometres from the coast in the North Sea, in 25 metres of water, and in the Baltic Sea, about 30 kilometres from the coast in a depth of 20 metres. Under these conditions, generation costs of a 450 MW offshore plant are about 10% cheaper than those of a 90 MW offshore station. Furthermore, generation costs of a 90 MW North Sea station are about 8% lower than a 90 MW Baltic Sea station, with the same difference found between a 450 MW station in the North Sea compared with a 450 MW station in the Baltic Sea. A 90 MW onshore coastal station would generate about 18% cheaper than a 90 MW offshore station in the North Sea and about 24% cheaper than a 90 MW offshore station in the Baltic.

The 90 MW North Sea station would achieve a return on capital of only 5.8% over 20 years, assuming the minimum rates fixed for wind power under Germany's renewable energy law, the Erneuerbare Energien Gesetz (EEG) -- currently DEM 0.178/kWh (box). The much larger 450 MW offshore station in the North Sea, benefiting from economies of scale, would manage a return of 10.7%, the study says. The return on capital invested in the 90 MW and 450 MW Baltic Sea wind stations would be rather lower.

In coming to its conclusions the study takes inflation into account and rules out the option of state grants or cheap loans. It assumes a 15% return on capital and a borrowing rate of 7% and takes its costs figures from various sources. Döringer stresses that the findings are based on theoretical wind stations and are not directly applicable to actual projects. He adds that "returns for offshore wind can be expected to rise as better turbines are developed and associated infrastructure measures like grid connection and foundations are improved."

According to Fichtner, only the onshore 90 MW wind station could yield more than the desired 15% return on capital -- assuming EEG rates for the production, which are DEM 0.178/kWh for the first five years, from which point they decline. Over a 20 year period the return would be 20.3%.

90 MW too small

"The findings correspond with our experience. A 90 MW pilot project is too small for the locations well out to sea," says Winkra's Ernst. His company is developing a single project in the Baltic Sea and three in the North Sea, one of which is very small and sited in the Bay of Jade, at the port of Wilhelmshaven.

Whether a 15% return on capital is the aim of all offshore developers is an open question. Although 15% is reportedly achieved by some German onshore developments, 8% or 9% is described as a normal return on German onshore wind projects, according to a report by GSC Research from June 2001. GSC compares this with the 16% return that is expected on wind projects in Spain.

Duden of Energiekontor, too, finds the 15% figure "relatively high," admitting though that there is a lot of discussion on this point. While declining to go into detail he says "our offshore projects are economic." His confidence is underpinned "by sound knowledge of the costs of the individual elements of an offshore project, such as turbine, foundation, switching gear, undersea cable, and grid connections." The wind sector "doesn't have to reinvent everything. We can use existing know-how," he says.

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